A few financial slip-ups in the past can have a surprisingly big impact on your credit rating. A bad credit rating indicates that you may be a risky borrower, which can make it difficult to get the bank’s approval when the time comes to apply for a home loan.
Thankfully, there are other options available. Here at iLender, we’re firm believers that a couple of financial hiccups shouldn’t prevent you from accessing competitive mortgage deals.
In this blog post, we’re going to examine how your credit score can affect your home loan application and discuss the best mortgage options for those with bad credit.
What’s your credit score?
As you may already know, your credit score is a numerical value that indicates your creditworthiness – that is, how likely you are to pay your debts on time. This number is based on your credit history and takes into account all of your credit-related transactions, including credit card payments, overdrafts, personal loans, phone contracts, equipment rental, utilities and more.
Credit bureaus collect this information to calculate your credit score and provide it to lenders when requested. You can get a free copy of your credit record from any one of the reporting companies operating in New Zealand:
A bad credit score can be disheartening, but the good news is there are ways to improve your score over time. Sorting out your debts, consistently paying bills on time and correcting errors in your credit report can go a long way toward building a healthier credit score.
Why is your credit score important?
Your credit score is important because it influences whether or not a lender will approve your loan. The higher your credit rating, the more likely it is that a bank will approve your mortgage. On the other hand, if your credit report is marred with late payments, loan defaults or insufficient credit history, a bank may perceive you as a risky borrower and be less inclined to grant you a loan.
It’s worth noting that a loan default can stay on your credit record for five years – even after you’ve paid the amount in full.
If you have a bad credit score, you may find it challenging to secure a home loan from a bank. Banks are quite risk-averse and tend to err on the side of caution; as a result, a bad blemish on your credit report will often lead to your home loan being rejected.
However, obtaining a home loan is still possible for people with a bad credit rating. In New Zealand, there are a wide range of non-bank lenders with varying risk tolerances, many of which are more willing than banks to accommodate bad-credit borrowers.
Non-bank lending and bad credit mortgages
A Non-bank lender is a financial institution (such as a building society or credit union) that offers credit and loan products but is not a bank. As it stands, Non-bank lenders make up about two percent of the New Zealand home loan market, but that number is growing as Kiwis look for alternative ways to fund their property purchases.
Non-bank lenders do not credit score, with each application being treated individually, to get the best outcome.
Non-bank lenders are privately owned and are not bound by the same rules that apply to banks, which gives them more leeway over lending criteria, whilst abiding by all consumer protection laws, making them very safe.
This freedom allows non-bank lenders to offer a diverse range of products, including bad credit home loans. Specifically tailored to customers with poor credit history, bad credit mortgages are an excellent option for buyers who are unable to obtain a home loan through a conventional bank.
Non-bank mortgages may have higher interest rates to offset the increased lending risk. However, you are not necessarily tied to those rates for the duration of your loan. Once you are on the property ladder and have proven you’re able to consistently make payments on time, you may be able to refinance into a bank loan with more competitive rates in the future.
Contact the bad credit home loan specialists
When the bank says “No” we like to say “Yes”.
If you have a problem with proving income, current or past arrears, or a poor credit report,
At iLender we put your best interests first and not the Bank - our advice is impartial as all Lenders who we do business with pay about the same in commissions.
Although we are Auckland based Mortgage Brokers, we help customers everywhere in New Zealand and overseas with buying property in New Zealand, as we are very much about online and giving advice here and now!